endowments

Watch webinar on Endowment follies!

Check out this 50 minute webinar presentation that is a follow-up to my previous blog post.

Endowment follies abound!

Throughout my 20+ year career in law and planned giving, I see various patterns that emerge that are sometimes frightening and clearly give us (nonprofit fundraisers) reason for concern.

One such area of frightening incompetence (as it turns out) is simple endowment management.

That includes the investment of “endowment” monies.  Sure, it is very troubling when institutional leadership violate every rule in the book regarding investment of endowment funds: over investing in hedge funds, allowing investment committee members to manage part of the pool, lack of independent oversight, etc… Yes, very troubling but not why I am writing this post.

My issue today is something even more basic: bookkeeping and record keeping and just following the law!

How hard are these tasks? Finance folks must be able to handle them?

Well, I have found in most cases the answer is that apparently bookkeeping and record keeping are not so easy – at least for those tasked with doing it!

Yesterday, I glanced at some endowment fund totals for a client going through an extensive entity merger that required filings with the attorney general, clarifications about which funds can have their restrictions released, etc… Actually, a very complex process in New York, by the way.

What did I see yesterday that has me all in a tilly?  I saw one endowment fund’s initial principal was around $500,000 and its appreciation was over $1.5 million.  Hmmmm.  A permanent endowment? Yes, probably close to 30 years old. Their supposed spending rate? 5% or more.  Hmmmm. Yes, this endowment pool was invested very aggressively (your draw would drop if you knew what percentage of this particular endowment had been in hedge funds going into 2008).  Ok, maybe it just grew tons, lost 50% of its value in 2008 and the winnings were still $1.5 million on their $500,000 principal?

I am not going to bother with the math.  There is something wrong with this picture.  If the organization actually withdrew any spending rate, it would be nearly impossible for the fund to more than triple in value, especially after they got killed in 2008 (and didn’t recover because hedge funds are probably not the best option for investment recovery).

My guess?  Maybe they withdrew the spending rate from other funds and didn’t subtract the distributions from the particular fund’s ledger page? Maybe they didn’t spend anything?

What else did I see? Some funds without any documents at all.  Numerous funds whose restrictions should have been released 20 years ago. A complete and utter disregard for the state’s legal requirements regarding managing those endowments (this is NY and NY has the most complex endowment management law).

In yesterday’s meeting, I am estimating that the initial entity that brought in the endowments – and which has been suffering due to its endowment market losses – blew its chance at sorely needed budget relief to the tune of $100 million or more!  What I mean is that if finance/legal staff at that institution had been doing their jobs well, they could have seen that much or more cash flow into their operating expenses that were severely needed through proper endowment spending and freeing up of old/outdated funds.  Instead, they borrowed more money, sold more property and finally were forced into the merger situation that I’m peripherally advising on.

Of course, yesterday’s revelation was no surprise to me.  I have seen endowment managers who use laws that were out of date by 20 years or more. And, I have seen cases where magically an endowment fund kicks off the exact same dollar amount each year and they tell them the funds are there and invested. In fact, I can not recall seeing an endowment program managed properly – from bookkeeping, records, the law, etc.. – EVER.

This blog got a huge boost when New York finally passed its version of UPMIFA – in fact, that was the single largest day of viewers for several years.  So, I put together a great presentation on NYPMIFA and assumed plenty of NY nonprofits would need my help (as it was and is so clearly needed).  Well, I did not sell one NYPMIFA audit.  People tuned in, asked questions, and then went about their way of ignoring the law and screwing up their endowments further.

So, why did the above nonprofit have to actually clean up a mess?  They were going through a complex merger that involved moving of endowment funds from one entity to another.  And, lo and behold, they now have a major law firm helping them address the issues because there are so many.

What’s my point?  Maybe it is the nature of those tasked with simple bookkeeping and record keeping and following endowment law?  Maybe they are just stubborn and/or lazy or just uninformed?  Maybe it is human nature to wait until you are forced to address something?  New York, for instance, could put together a SWAT team of auditors and easily bring down over 90% of NY’s nonprofits for utterly spitting in the face of their law. Very, very few NY nonprofits follow NY endowment law but until the NY attorney general’s office decides to actively enforce NY state law, nonprofits will continually do themselves the major disservice of totally botching their endowments.

I guess my frustration is that virtually none of these nonprofits sought help in this area. Thousands checked out this blog, picked up all of the advice I flooded them with. But, none – zilch – actually took the step to even discuss fixing their problems.  At least not with me!  And, my guess is that very few actually implemented what they were supposed to.

Of course, by the time you are forced to address your endowment issues, you’ll likely be forced to hire one of those white shoe law firms who will easily charge 100 times more them me. Or, in this case, one entity will be left lamenting why they didn’t address their problems earlier – it could have actually help salvage their situation. Instead, a new entity is cleaning up (both literally and figuratively!).

Check out this short video on the Higher Education Bubble

This is a very well done, short video on serious issues facing Higher Education. It all makes me wonder which institutions will weather the bursting of this bubble. Anyone….endowments? Changing business models?

Good thing Penn State has a big endowment

Readers of this blog know that I periodically comment on news stories that somehow intersect with planned giving.

Penn State story and planned giving?  Well, yes.  Here is a link to a Reuters story that just broke on the Sandusky scandal:

http://www.reuters.com/article/2012/07/12/us-usa-crime-sandusky-idUSBRE86B05D20120712

What caught my attention?  The following two sentences from the article:

“The report could influence Penn State as it prepares for potential civil lawsuits. The university has already invited victims to try to resolve claims against the school.”

 

It reminded me that Penn State is on my list of “Big Ten of Planned Giving” for being one of the most productive university planned giving programs in the country, reporting over $100 million received from 1,451 planned gifts (bequests and deferred gifts) between 2005 and 2010.  That is an average of around 240 planned gifts a year over those 6 reporting years.  For anyone familiar with planned giving programs, that number is incredible.  A strong planned giving program with a few staff members and significant marketing might bring in 40 or 50 planned gifts a year.  Over 200 a year?  They are a planned giving machine!  Maybe even more of a machine than their vaunted football program.

That brings us to Penn State’s endowment.  According to Commonfund research on university endowments, Penn State’s stands at around $1.7 billion, the 39th largest in the country.

Not that endowment money is available to settle law suits but it sure does help.  If I were one of the plaintiff’s attorneys, I would take note!

The other question I am wondering about is what will be with their planned giving program going forward?  Let’s see if they can keep it up.  The football program looks like it will be fine – and that is where the scandal lies.  But, certain illusions about Penn State’s purity of heart have been smashed.  Maybe the planned giving donors will realize this and have a change of heart about their final plans.